Banks seem set for easier year

The current calendar year is likely to bring some relief for Indian banks in terms of asset quality, as bad loans are expected to show a declining trend from March, helped by expected easing in interest rates by the Reserve Bank of India (RBI).

“If we look at asset quality, the current calendar year is expected to be better than the previous year,” said Kajal Gandhi, banking analyst, ICICI Securities.

“Banks are expected to report rise in bad loans till March quarter but after that pressure on asset quality is likely to reduce.”

The year 2012 was a bad year for banks, especially in terms of bad loans.

According to RBI data, gross non-performing asset (NPA) ratio of banks rose sharply to 3.6% of advances at the end September 2012 from 2.9% at the end March 2012.

Public sector banks witnessed a high degree of deterioration in asset quality compared to their private peers.

“Asset quality of banks was severely impaired last year, as revealed by the steep increase in NPAs, owing to their significant exposure to troubled sectors such as power, aviation, real estate and telecom,” said Sanketh Arouje, leader, economy analysis group, Dun & Bradstreet India.

According to rating agency ICRA, banks’ gross NPAs are likely to cross Rs. 2 trillion and reach 3.6-3.8% of gross advances as on March 31, 2013, up from 2.8% a year ago.

Easing in interest rates will play a crucial role in improving the asset quality of banks.

“Interest rates are expected to head downward in 2013 as the RBI has guided for a rate cut in the first quarter of 2013, which is a positive development for improving asset quality,” said a senior official of a public sector bank. “Cases of loan defaults decline with easing in interest rates.”

Last year banks saw their exposure to debt-laden firms such as Kingfisher Airlines, Air India and Deccan Chronicle Holdings turning into NPAs, which made a huge dent on their profitability.